Entrepreneurship, knowledge and employment

Corn Model, Subsistence System and the Empirical Economy

Sinha Ajit, Azim Premji University

In this paper I argue that the nature of Sraffa’s problem of the determination of prices and the rate of profits for an empirical economy can be understood by breaking it into Sraffa’s two insights for much simpler systems: ‘corn model’ and ‘subsistence economy’. In the corn-model, corn is the only basic good. In this system, e.g., if 20 kg corn seed-capital results in 40 kg corn harvest and 10 kg corn is paid as wages after the harvest then the rate of profit in this economy is equal to 50%. In this case the rate of profit is determined by production equation and the given wages. The first point to note is that this rate of profit is independent of prices—if we add n non-basic goods on top of this one basic good system, we will still have the same rate of profits prevailing in the whole economy (leaving aside the case of ‘beans’). The second point to note is that this rate of profit is independent of demand considerations—it does not matter whether the capitalists desire to consume the 10 kg corn left with them or invest them in the next production cycle or let it be eaten by rats. In other words, the question of ‘realization’ of profits is not relevant to the determination of the rate of profits. In a ‘subsistence economy’ there is no surplus output and so no question of the determination of profits, but the system is made of n basic goods. So the problem for this system is to determine the price ratios such that the system can reproduce itself. In this system as well, the equations of production has sufficient information to determine those unique prices that would allow the system to reproduce itself. Yet again, demand plays no role. Now, an empirical system of n basic goods that produces surplus is, in a sense, a combination of ‘corn-model’ and ‘subsistence economy’. I shall argue that with the help of the Standard system and the Standard commodity, Sraffa proves that the insights of the two simple systems mentioned above also hold for the more complex case

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Keywords: Sraffa, Standard system, Standard commodity, corn model, subsistence system, empirical economy

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